A number of visitors to the Legal Costs Blog have been searching for clarification of how the change in the VAT rate impacts on solicitors’ fees and how VAT should be dealt with when drafting bills of costs. This post will try to cast some light on the issue. The main sources of information on this point are the not overly helpful HMRC website (see link) and the far more helpful VAT practice note on the Law Society website (see link). The examples below are partly based on those given in that practice note. The notes states: “the Law Society will not accept any legal liability in relation to” its practice notes. The same applies here.
This guidance is concerned with the limited issue of the appropriate rate to be claimed between the parties in civil litigation claims. Entirely different rules may apply in other situations. This is an idiot’s guide designed to be as easy to understand as possible (no use of terminology such as “basic tax point”).
Prior to 1 December 2008 the VAT rate was 17.5%.
Between 1 December 2008 and 31 December 2009 VAT was reduced to 15%.
VAT returned to 17.5% on 1 January 2010.
In a number of situations a solicitor can elect whether to charge VAT at 15% or 17.5%. However, we are concerned with the position of costs recovery between the parties. The Costs Practice Direction reads:
“5.7 Where there is a change in the rate of VAT, suppliers of goods and services are entitled by ss.88 (1) and 88(2) of the VAT Act 1994 in most circumstances to elect whether the new or the old rate of VAT should apply to a supply where the basic and actual tax points span a period during which there has been a change in VAT rates.
5.8 It will be assumed, unless a contrary indication is given in writing, that an election to take advantage of the provisions mentioned in paragraph 5.7 above and to charge VAT at the lower rate has been made. In any case in which an election to charge at the lower rate is not made, such a decision must be justified to the court assessing the costs.”
It is hard to imagine a situation where a receiving party would be able to reasonably elect the higher rate. We will therefore proceed on the basis that the lowest rate available is the rate that should be claimed in an inter partes bill of costs.
Example 1
Solicitor instructed in relation to personal injury claim. Instructions received and retainer commences in January 2009. The claim concludes in December 2009. Costs payable by the other side. VAT should be claimed at 15% throughout. (This assumes the bill of costs was also drafted in December 2009.
Example 2
Solicitor instructed in relation to personal injury claim. Instructions received and retainer commences in January 2009. The claim concludes in 2010. Costs payable by the other side. VAT should be claimed at 15% on the work carried out before 1 January 2010 and 17.5% on the remainder of the costs.
Example 3
Solicitor instructed in relation to personal injury claim. Instructions received and retainer commences in January 2006. The claim concludes in December 2009. Costs payable by the other side. Costs are not agreed or assessed until April 2010 and further work is undertaken with regards to that. Provided that no interim invoices have been raised or payments received over the entire course of the matter, which would be the case if there was a conditional fee agreement, then VAT should be claimed as follows:
· 17.5% in relation to the period from January 2006 to 30 November 2008
· 15% in relation to the period from 1 December 2008 to 31 December 2009, and
· 17.5% in relation to the period from 1 January 2010 to April 2010
If an interim invoice was raised during the course of the matter, then the rate to claim will be the same as that on the invoices issued.
Example 4
The Law Society’s practice note gives an example where the facts are similar to Example 3 above but each party is to pay their own costs. If an invoice is raised in January 2010, the practice note claims that all work done prior to 1 January 2010 can be charged to the client at 15% including the work done prior to 1 December 2008. It seems a strange anomaly, if correct, that the pre-1 December 2008 rate retrospectively increases on an inter partes bill but not on a solicitor own client invoice. Most bills drafted in 2009, at least in CFA cases, claimed VAT at 15% throughout even if the claim had started pre-1 December 2008. Any VAT experts out there should feel free to comment (just don’t get too technical).
Disbursements
The rate of VAT claimable in respect of disbursements will depend on the date on which the invoice for the disbursement is issued, regardless of when the disbursement was incurred.
Counsel’s Fees
It appears that the same rules apply as for solicitors’ fees.
At the end of last year I began to see a number of bills of costs where VAT was claimed at 15% but on the basis that if costs were not agreed and/or paid by 1 January 2010 the rate would increase to 17.5%. There appears to be no basis for this suggestion.
Now lets all hope that they stop messing about with the rates.
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This information is incorrect, please go to HMRC for the correct manner to calculate VAT
HMRC’s guidance
1. VATTOS8520 – Tax points for specific categories of supplier: solicitors: basic tax point
The majority of supplies by a solicitor are single supplies, albeit the supply may involve work undertaken over an extended period of time. A good example of this is litigation. The basic tax point occurs when the services have been fully completed.
But it can be difficult sometimes to establish precisely when this might be, especially where the matter has taken a number of years to be resolved. In these circumstances you will have to be guided by solicitors themselves subject, that is, to what is claimed being reasonable.
Some solicitors make supplies on a regular basis to an individual client. In most cases this will represent a series of separate supplies, each of which will be subject to its own basic tax point. Where it is the solicitor’s practice to bill the client periodically for all work performed or completed during the period, it is important to ensure that the basic tax point rules are complied with for each of the separate supplies. Only in exceptional circumstances, such as where a solicitor is retained and remunerated as a permanent legal adviser or to act as the client’s legal office, might this kind of relationship represent a continuous supply of services. But there are some types of legal work that are inherently continuous in nature. An example being the supply of the services of a solicitor acting as a trustee. These supplies normally fall within the scope of the time of supply rules that apply to continuous supplies
2. VATTOS8540 – Tax points for specific categories of supplier: solicitors: adjustments to fees
Introduction
In certain circumstances a solicitor’s fees can be subject to third party scrutiny and adjustment before acceptance. The circumstances in which this can occur and the tax point consequences depend on the type of work involved.
Contentious work (non-Legal Aid)
The losing party to the legal action may be ordered to pay costs. Where this is the case, the solicitor for the successful party prepares a bill which is then either agreed with the solicitor for the loser, or is referred to the Court for scrutiny under the taxation procedures. Settling of the costs in these circumstances is part and parcel of the solicitor’s overall supply to the client. A basic tax point does not therefore occur until either the costs have been agreed between the solicitors or the taxation procedure is complete.
Solicitors – The Law Society
The procedure for drawing up solicitor’s bills is such that most solicitors are unable to issue an invoice within 14 days after the date of completion of their services. The following general extension has therefore been granted to all VAT registered solicitors:
If the consideration for a supply of services by a solicitor is not ascertained or ascertainable at or before the time when the services are performed, the supply may be treated as taking place at the time when the solicitor issues a VAT invoice in respect of it provided that the VAT invoice is issued not later than 3 months after the date of performance of the services.
Section 88(1)-(3), (6) and (8) sets out the special rules that can be adopted for supplies that take place around the time of a change in VAT rate or liability. Suppliers may opt to use the rate of VAT in force at the time of the basic tax point where this is different from the rate that would otherwise be applicable under the normal tax point rules. But this only applies to the rate of VAT. For all other purposes the normal tax point rules continue to apply. So, for example, in the case of a supply where the tax point would normally be the issue of an invoice 10 days after the basic tax point, this continues to be the time at which the VAT must be accounted for. But if, in the meantime, there has been a change in VAT rate or liability, the supplier may choose to invoice the supply at the VAT rate applicable at the time of the basic tax point.
There are some limitations and, under 88(6), this facility cannot be adopted for supplies subject to self-billing arrangements or where the supply involves goods disposed of by a third party in satisfaction of a debt. Further details about disposals of goods in satisfaction of debts can be found in manual covering supply and consideration.
Section 88(3) brings supplies that are subject to the time of supply regulations potentially within the scope of these change of rate arrangements. This is activated by regulation 95 of the VAT Regulations 1995 (see VATTOS2390). Section 88(8) defines ‘reduced rate’ for the purposes of the section. For further information see VATTOS7200.
VATTOS2280 – Legislation: UK primary law (VAT Act 1994): Section 88 Supplies spanning change of rate, etc
Law
88(1) This section applies where there is a change in the rate of VAT in force under section 2 or 29A or in the descriptions of exempt, zero-rated or reduced-rate supplies or exempt, zero-rated or reduced-rate acquisitions.
(2) Where –
(a) a supply affected by the change would, apart from section 6(4), (5), (6) or (10), be treated under section 6(2) or (3) as made wholly or partly at a time when it would not have been affected by the change; or
(b) a supply not so affected would apart from section 6(4), (5), (6) or (10) be treated under section 6(2) or (3) as made wholly or partly at a time when it would have been so affected,
the rate at which VAT is chargeable on the supply, or any question whether it is zero-rated or exempt or a reduced-rate supply, shall if the person making it so elects be determined without regard to section 6(4), (5), (6) or (10).
(3) Any power to make regulations under this Act with respect to the time when a supply is to be treated as taking place shall include power to provide for this section to apply as if the references in subsection (2) above to section 6(4), (5), (6) or (10) included references to specified provisions of the regulations.
(4)
(5)
(6) No election may be made under this section in respect of a supply to which paragraph 7 of Schedule 4 or paragraph 2B(4) of Schedule 11 applies.
(7)
(8) References in this section –
(a) to a supply being a reduced rate supply, or
(b)
are references to a supply …… being one on which VAT is charged at the rate in force under section 29A.
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Commentary
Section 88(1)-(3), (6) and (8) sets out the special rules that can be adopted for supplies that take place around the time of a change in VAT rate or liability. Suppliers may opt to use the rate of VAT in force at the time of the basic tax point where this is different from the rate that would otherwise be applicable under the normal tax point rules. But this only applies to the rate of VAT. For all other purposes the normal tax point rules continue to apply. So, for example, in the case of a supply where the tax point would normally be the issue of an invoice 10 days after the basic tax point, this continues to be the time at which the VAT must be accounted for. But if, in the meantime, there has been a change in VAT rate or liability, the supplier may choose to invoice the supply at the VAT rate applicable at the time of the basic tax point.
There are some limitations and, under 88(6), this facility cannot be adopted for supplies subject to self-billing arrangements or where the supply involves goods disposed of by a third party in satisfaction of a debt. Further details about disposals of goods in satisfaction of debts can be found in manual covering supply and consideration.
Section 88(3) brings supplies that are subject to the time of supply regulations potentially within the scope of these change of rate arrangements. This is activated by regulation 95 of the VAT Regulations 1995 (see VATTOS2390). Section 88(8) defines ‘reduced rate’ for the purposes of the section. For further information see VATTOS7200.